Can Skills Shortages Justify Higher Pay?
The Employment Appeal Tribunal’s (EAT) recent decision in Next Retail Ltd and Next Distribution Ltd v Thandi and Others [2026] EAT 130 is likely to become one of the most important equal pay judgments for employers in recent years. Although the case arose from claims brought by over 3,500 retail sales consultants employed by Next, the principles established by the EAT extend far beyond the retail sector and have significant implications for engineering employers across Scotland and the wider UK.
The claimants, who were predominantly female retail sales consultants, had already established in earlier proceedings that their work was of equal value to that performed by predominantly male warehouse operatives. The dispute before the Tribunal was therefore not about the value of the work itself, but whether Next could justify paying warehouse employees more than retail employees by relying on the “material factor” defence under section 69 of the Equality Act 2010. Next argued that higher rates of pay in its warehouses were driven by labour market realities, recruitment and retention challenges, operational requirements associated with a 24/7 distribution network, productivity considerations and broader business needs.
While the original Employment Tribunal found that some of these factors existed, it concluded that Next had failed to justify important elements of the pay disparity. The EAT disagreed and overturned key aspects of that decision. Crucially, the EAT found that the Tribunal had focused too heavily on why retail workers were not paid more, rather than examining why warehouse workers were paid more. The EAT accepted that attracting and retaining sufficient warehouse labour was a legitimate business objective and that higher rates of pay designed to achieve that objective could be objectively justified. The judgment confirms that employers are entitled to respond to labour market pressures where there is evidence demonstrating that higher rates are genuinely required to recruit and retain staff.
For employers, the most significant aspect of the judgment is the Court’s treatment of market forces. Historically, tribunals have approached market rate arguments cautiously because labour markets can sometimes reflect historical gender inequalities. However, the EAT clarified that market forces are not automatically tainted or discriminatory. An employer can successfully rely on labour market conditions where it can demonstrate that higher pay genuinely reflects recruitment difficulties, retention challenges or operational necessity. Importantly, the EAT confirmed that employers are not required to prove that wider labour markets are entirely free from historic gender bias before relying upon market based pay decisions.
For Scottish engineering, this is a particularly important development. Engineering businesses frequently operate in an environment where specialist technical skills command substantial salary premiums. Organisations regularly face challenges recruiting maintenance engineers, automation specialists, controls engineers, design engineers, software engineers, project engineers and other highly skilled technical professionals. In many cases, employers are forced to increase salaries,
offer recruitment bonuses or provide additional benefits simply to remain competitive in the labour market.
In recent years, Scottish engineering has consistently reported concerns regarding skills shortages, an ageing workforce and increasing competition for specialist talent. Many organisations have found themselves competing not just with other engineering companies but also with sectors such as energy, defence, technology, renewables and advanced manufacturing. The reality is that certain engineering roles attract higher rates of pay because the market demands it. This judgment provides reassurance that where employers can evidence those labour market challenges, salary premiums may be capable of objective justification. The decision recognises a commercial reality that engineering employers have understood for years: not all roles can be recruited at the same cost, and not all labour markets operate in the same way.
However, employers should be careful not to interpret the judgment as a licence to maintain unexplained pay differences. The EAT did not say that market forces automatically justify unequal pay. Rather, it emphasised the need for evidence. Employers must be able to show why particular skills attract higher rates of pay and how those rates support legitimate business objectives. In an engineering context, this may involve demonstrating repeated recruitment difficulties, evidence of market benchmarking, data showing vacancy rates, reliance on agency workers, evidence of turnover in key roles, or operational risks associated with failing to recruit specialist employees. Simply stating that technical roles have “always been paid more” is unlikely to provide the robust justification that a tribunal would expect.
The judgment should also prompt employers to think carefully about equal value claims more broadly. Engineering remains a male dominated profession, particularly in technical, maintenance and production roles. At the same time, support functions such as administration, customer service, HR and finance often have a higher proportion of female employees. While it may seem obvious to many employers that engineering positions attract higher pay, equal pay law does not simply compare job titles. If employees can establish that roles are of equal value, employers may ultimately need to justify any pay disparity through evidence and legitimate business reasoning. This case demonstrates that such justification is possible, but only where there is a compelling evidential basis for the decisions made.
For HR professionals, the judgment serves as a timely reminder of the importance of governance and documentation. Pay decisions should be evidence based, recorded and periodically reviewed. Organisations should ensure they understand exactly why pay differentials exist across the business and whether those reasons remain valid. Recruitment and retention data should be retained, salary benchmarking exercises should be documented, and any market supplements or skills premiums should be regularly assessed to determine whether they continue to be necessary. If an organisation is relying on labour market pressures to justify pay differences, it should expect to produce evidence supporting that position should a challenge arise in the future.
Ultimately, this decision is a positive one for employers because it reflects the realities of modern labour markets and recognises that businesses sometimes need to pay more for particular skills.
For the engineering sector, where talent shortages remain a persistent challenge, the judgment provides useful authority supporting the principle that market driven pay premiums can be lawful. Yet the decision also contains a clear warning. Employers cannot rely on assumptions, tradition or unsupported assertions. If they wish to defend pay differences, they must be able to demonstrate that those differences are linked to genuine business need and supported by credible evidence.
